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Ask The Experts: Employee or Independent Contractor
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Q: I have been self employed for over 10 years and love what I do. My biggest client wants to change my classification to an employee instead of continuing as an independent contractor. Is it better for me to switch to employee or to stay as an independent contractor?
A: The most important thing to keep in mind is that the classification of a worker as either an independent contractor or as an employee is NOT a matter of choice. The classification is dictated by the overall working relationship between the company and the worker and is based on things like behavioral control and financial control. In other words, if the company basically tells the worker when to be at work, how to do the work, provides the tools to do that work, and maybe even tells the worker what to wear to work, then most likely the relationship is one of employer and employee. If, on the other hand, the company only controls the end product with the worker deciding all of the hows, whens and wheres then most likely the relationship is one of company and independent contractor.
Again, the key point is that the classification is not a matter of choice. Further, the company has the primary responsibility of evaluating the facts and circumstances of the working relationship and therefore determining a specific worker’s classification. There are pros and cons to each, but the bottom line here is that the employer, the client, is responsible for determining the working relationship and they must decide based on the facts and circumstances of their specific situation. If they have determined that the relationship is indeed one of employee/employer, most likely it will not be up to you.
If your client has determined there needs to be a change in classification, there a number of differences to consider. First, if all of the work is the same, the pay is the same, and nothing else changes, the simple math would indicate that an employee will benefit by about 7.65% of the gross wages paid, since as an employee, the client will pay for half of the Social Security tax. As an independent contractor you would be responsible for self employment tax at the rate of 15.3%, while as an employee, you would pay only half of the tax or 7.65% while the employer would pay the other 7.65%.
Second, the business expenses you incur, if any, could be a bit different since as an employee any unreimbursed expenses you have in connection with the job such as mileage or supplies would not be fully deductible but instead are subject to a 2% of AGI floor. That basically means that the first 2% of your AGI in expenses would be disallowed.
Perhaps the biggest differences are the more intangible differences such as the potential for other non-monetary benefits such as time off, vacation, health benefits, etc. which may be hard to quantify. Likewise, the feelings of control, independence, flexibility, etc. that often come with self employment are difficult to quantify. The best advice would be to sit down with your client and make sure that you both have a good understanding of expectations and goals for the relationship. Discuss options and benefits and certainly maintain the highest level of communication, and regardless of classification you both will have created a new job.